Make your money work for you!

Month: February 2016

Since Latvian sites are doing rather well at attracting Estonian investors, then I decided to also test out the third Latvian portal, adding a small amount of loans at Viventor to my investments, which already include Twino and Mintos.

What does Viventor offer?

Viventor started off with offering low interest and low LTV real estate loans and they just recently added short term (1 month) Spanish consumer loans with a set 12% interest rate and a buyback guarantee. Essentially what they seem to be building towards in one sense is a Mintos-like marketplace where different originators can finance loans and have 10%ish returns with buyback. It will be somewhat interesting to see how the battle for their marketshare will work out when competing against one another, but since Viventor has seemed to start from southern Europe there might be enough room for all. Also, P2P in general holds such a small part of the overall lending market that there should be room for everyone.

How does the site work?

Overall, the site at this point works rather weakly. It seems to be developed live, meaning a lot of things investors are used to from other sites are missing. This includes things like a properly functioning autobidder, data export, easy to read cash flow report, and a whole pile of comfort functions.

I invested into my first loans manually and supply isn’t an issue in the sense that the site doesn’t really have a whole lot of investors yet and their history is by far the shortest of all P2P sites nearby. However, provided that they manage to work on usability they might have a volume issue rather soon as well (at this point there are 144 loans listed on primary market).

Overall, I hope for very quick improvements for the web, proper reporting would be step number 1, since I created a business account and require usable documentation. Secondly, adding on other originators would likely increase their trustworthiness a fair bit as well. Interesting times at least, seeing Latvians claim large parts of the Baltic P2P investors’ money.

Loans having buyback has caused interesting moves on the P2P market. Many investors flocked to the idea of having more guarantees, with rather solid returns – it was possible to earn 13-15% annualized with buyback guaranteed loans. However, the interest rates of loans have come down and I’ve witnessed several discussions on how the lower interest rates are not good enough anymore.

Twino announced that they are reducing interest across the board to 10% per annum to align better with the corporate interests. Mintos interest rates have also been slowly coming down on many of the buyback guaranteed loans and is starting to average closer and closer to 10%. So, is a 10% return too low?

Comparing returns & risk to other investments

If you look at the current state of what’s happening on the markets, then 10% in comparison to that is a rather reasonable number. Stock markets are not doing particularly great, and short term reaching such returns without taking significant risk is rather impossible. Looking at real estate, you can get returns that are higher, but that includes quite a lot of work on your part. If you look at passive investments, then I’d say that the 10% number when looking at the effort you have to put into the investment is rather reasonable.

Another issue, however, is the risks involved with investing. I heard more than one person say that with the lower rate the risk is no longer worth it. I’d actually be super interested to read any kind of actual risk analysis on this, because one thing that people seem to not keep in mind is that by reducing the interest rate the companies that offer it actually lessen the financial strain they place on themselves, making it less likely that they will fold in the future. So to some extent bringing the interests down actually also reduces the risk levels.

The third thing to keep in mind is the issue of supply and demand. Paying higher interest rates than strictly necessary is just bad business. It’s unlikely that any of the companies that have reduced the interest rates haven’t done serious analysis into the amount of money available on the market. In many countries people/investors are sitting on unprecedented amounts of money, meaning that there isn’t an issue of having enough supply. With other investments not offering similar returns with similar effort, enough people will gravitate towards P2P loans.

Will the rates drop further?

Seeing how some loans on the market in Mintos for example are already below 10% (and I know so are some Viventor loans), I’d actually dare say that there is still room for buyback rates to drop, because enough investors will appreciate the lack of default risk that they would have to carry otherwise. I don’t see the rates dropping much further, but clearly there is still enough money to go around.

Another thing that might influence the rates is also the inclusion of new investors. As buyback guaranteed loans get more and more attention more investors could enter the market driving the rates down even further. Those who remember what the market was like when Bondora bids worked by investors underbidding one another can easily imagine that driving rates to the ground is a rather viable option for those who earn returns more from the volume of their investments than the return rate.

When choosing a P2P platform to invest into, buyback has become a significant vote in favour of some sites. Others, however, are a bit suspicious and wonder how guaranteed return makes economic sense. This is a topic that I get a fair bit of questions about, and I was in the camp of those wondering where the catch was at start as well. However, this is the reason you do background checks – to figure out how the economic model of certain sites works and whether or not it makes sense.

Different options of buyback

Currently I invest on three different P2P sites that offer a buyback option. The Latvian sites Twino and Mintos offer a buyback campaign that purchases back delinquent loans. For Mintos the deadline is 60 days, for Twino the deadline is 30 days delinquent. (This seems to be a bit earlier at times, since I’ve been seen buybacks from both sites already.) The Estonian site Omaraha also offers a kind of a buyback – for them it’s a principal buyback in the value of ~60% of the remaining principal. Both Twino and Mintos however also pay out the interest you have earned. So, in theory for both of those sites it’s as near to guaranteed return as it can get in P2P, how does it make financial sense?

How do the numbers work?

The biggest question that you should be asking when it comes to buyback is this – how does the business still make a profit? This is the key issue – they have to be making profit off the loans otherwise the buyback would not be sustainable in case of an economic downturn. This means that despite the fact that some of the profits earned off loans are paid out to investors, the business still earns some. For both the Latvian sites the % you earn is in the ranges of 12-15% return on a yearly basis. This means that clearly the actual loan rate for the people taking out the loans has to be significantly higher to justify such a payout model. For Twino the loans are payday loans, meaning the interest rates are likely to reach up to 100%, for Mintos some of the loans are for example car loans, that are likely to go up to 30% per year. In addition to the overhead interest any and all penalties, extra interest and fees are also placed on top of the interest that you earn as an investor. This means that buyback is viable only for loans that have a high enough margin for the loan originators to cover (un)expected losses and wait for recovery to happen on defaulted loans. For Omaraha the interest rates on certain groups aren’t too high, which explains the buyback being partial – allowing a return of only a part of the principal. Bondora for example is against buyback on principal, but theoretically it could be implemented with good data workings provided they were interested in doing even more of the recovery (which they are not at this point in seems). Another important note here is the length of the loan – for Twino getting investors involved would be near impossible without buyback due to the short term of the loans, since waiting for recovery would be disproportionately long compared to the loan terms on the site.

Risks associated with buyback

In the world of consumer credit it’s common for companies to finance themselves using investors’ money. This is how most SMS-loan type businesses work – they release bonds at about 10-12% rates that finance their loan origination. Compared to the buyback process (and financing loans through the marketplace with investors’ money) releasing bonds is actually rather expensive – take into account all the fees for lawyers, documentation etc. Plus, financing the loans through a marketplace allows the businesses only use as much of the supply as they need, meaning they don’t pay out interest on money that’s still not used, actually probably making offering the buyback cheaper than other methods of financing their loan portfolio.

However, this does not eliminate risks completely. Firstly, in case of the loan originator going under you’re still in trouble. Secondly, even with the best laid plans, issues might happen – for example in case of a crisis buyback may be (temporarily) cancelled. Thirdly, this is an untested way of financing – issues may occur that none of us have been able to predict.

This means that you should still firstly diversify between different loan originators, still diversify between loans themselves and diversify across different investments and take a critical look at the background of the originators to see if their financial models work out. However, this might just be something that will take more ground in the world of P2P – reducing risks is one thing that might motivate more risk averse investors to try out P2P investments.

This month has been fun in social lending. I’ve been discovering new portals, rearranging investments to switch things to my business account and overall making plans for this year.

Bondora personal portfolio

I’m starting to take money out of my personal portfolio as of this month. Currently I’ve set it to invest into Estonian AA & A loans, seems like getting about 10 of those a month is a solid enough strategy. I’m hoping to take out all the money invested within the next two years and then make a full exit within the third. Despite that, January was a record month since the lack of reinvesting isn’t felt yet.

Total interest earned climbed a bit over 110€, next month should probably be a bit smaller in terms of the total amount yet. This month brought about many changes at Bondora, a lot of the new reports I like, the lack of meaningful recovery data is still a bit annoying, but overall I like the new cash flow, especially the predictive part of it.

Bondora business portfolio

There isn’t much to report here yet. I’ve invested into about 150 loans, and most of them start repaying in February. January interest income was ~10€, but the interest income for February should already be in the range of 50€. Current strategy is Estonian loans, up to C class (a bit of D as well), currently investing 20€ per piece mostly, seems like getting 100+ EST loans with non-strict criteria is rather easily doable.

Omaraha portfolio

Now, Omaraha is rather interesting. The guesswork included in trying to figure out which interest rates to use is definitely an intriguing thought exercise. Seems like I’ve managed to reach a sort of a sweet spot where I have, on average, one loan go out per month. No loans have reached delinquency yet, but time will tell how that starts impacting my portfolio. The defaulted loans get sold off to a buyback fund, so you can assess your returns in a more immediate manner than you can do in Bondora.

I started with the portfolio in November already, the interest payments are however just now ramping up, February totals should be somewhere in the range if 45€ already. Overall, not much to follow here and you don’t really have access to any meaningful data to analyse. Lack of secondary market is still problematic, so this can’t ever be the biggest part of my portfolio, even if the returns at this point seem rather good.

Mintos & Twino

The two Latvian sites are also in experimental stages at this point. Since I wanted to add money into short term loans, then so far Twino has been winning out on that – super easy and sleek user interface, no cash drag to speak of, and a wide array of loans to invest into. For Mintos, it seems that short term loans (or invoices) are in short supply if you want to actually diversify reasonally. Due to this I’ve added less money into Mintos so far, and I’ve had to pick out more long term loans to actually employ all the money. Both sites have secondary markets though, so exit is possible. So far looks like Twino will be winning out for me personally in this duel.

Estateguru & Moneyzen

I did not add in any money to Estateguru or Moneyzen. If possible, I would exit Estateguru as a private person and switch to a company portfolio. For Moneyzen a lack of a secondary market and lack of volumes makes me not want to add more funds either. Currently I’m just seeing how their recovery processes work.

Crowdestate

Not much happening on this front either. Waiting for some projects to end (the first one I was involved in, was finished in December). There will be a new project open on Monday so I’ll look into that and decide whether to contribute as well. Still hoping they manage to actually hit the pace of 1 project/month.